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Boston Beer Pockets $20.5 Million

May 10, 2011 | About:
Alex Morris

Alex Morris

36 followers
Three years later, Boston Beer (SAM) has finally been paid off for a voluntary product recall taken in April 2008. As noted in the company’s 10-K from this year, “The recall was a precautionary step and resulted from routine quality control inspections at the Cincinnati Brewery, which detected glass inclusions in certain bottles of beer. The bottles were from a single glass plant that supplied bottles to the Company. The glass plant in question supplied approximately 25% of the Company’s glass bottles during the first quarter of 2008.” The company had recorded costs associated with the recall of nearly $10 million in 2008, which cut net income in half; shares were up nearly 3% for the day on the positive news.

Today, the company reported that they have “entered into an agreement to settle all claims regarding the recall implemented by the Boston Beer Company in 2008. The Boston Beer Company will receive payment of $20.5 million, and all parties will release each other on any claims as they relate to this matter.” For Boston Beer shareholders, it was nice to see this come to an end; a positive result with the High Falls brewery litigation (which started in 2009) would be an added bonus to the company’s coffers.

As of March 26, the company had roughly $45 million in cash, and no debt on the balance sheet. After adding in today’s payoff, the company is sitting with more than $65 million in cash, or right around $5 per share in cash. I would be interested in seeing the company’s plan for the cash; while someone at AB InBev (BUD) or Molson Coors (TAP) would be interested in building a strong position in craft with a brand like Sam Adams, I highly doubt that the deal would ever go through. Sam Koch, CEO of Boston Beer, holds 100% of the Class B shares (the voting stock), and likely has no interest in selling out on his vision of brewing great beer for the masses (money’s not an issue, considering the millions worth of stock he already owns).

How about an acquisition from Boston Beer? Anheuser-Busch InBev NV (BUD) purchased craft brewer Goose Island in March for $39 million from Craft Brewer Alliance (HOOK). The big guys are looking to step in and fight for craft share; is it time for Boston Beer to consider adding to the portfolio outside of the company’s core brands? With millions in cash, zero debt, and 1,800 craft brewers in the United States, Boston Beer has plenty of options if they are interested in expanding their offerings outside of Samuel Adams.

About the author:

Alex Morris
I am a recent graduate from the University of Florida; I received a finance degree as well as a real estate minor during my time at UF. I will be sitting for Level 1 of the CFA Exam in December 2011, as well as for my series 65 exam. I am a value investor, plain and simple.

Rating: 4.8/5 (4 votes)

Comments

Bill Smith
Bill Smith premium member - 3 years ago


Hey, Alex: congrats on the graduation! You've been a pretty prolific writer lately :-) Did you take advantage of SAM's 10% plunge the other day?

According to SAM's conf. call, no brewery purchases are planned "in the next few years." However, I wouldn't rule something out in the next 5 or 6 years. That's speculation on my part, but based on the fact that at 95% organic production, during particular seasons, they're pushing the limits on their brewhouse and should outgrow what they have by then. This would cost them anywhere from $50M to $100M, or 1-2 years FCF.

Alex Morris
Alex Morris - 3 years ago
Brewer,

Thank you sir, much appreciated. For the time being, I am without a job; that means I will be a full time writer on GuruFocus until further notice :)

I should have taken advantage of the plunge! Certainly keeping an eye on it; unfortunately, cash is only a small part of my portfolio, and buying SAM would have meant moving to 0% cash (learned my lesson in March 09) or selling one of my other holdings; once I get some more capital though (and if the price doesn't move too much), I'll be a SAM shareholder.

Great point on the brewery, something that totally slipped my mind. Yeah, based on how they had written the comment in the last 10-K, they made it sound to me that a new one would be needed pretty soon. Do you have any thoughts on them acquiring smaller craft brewers? Or do you think this is outside of Koch's vision? Thanks again!
Bill Smith
Bill Smith premium member - 3 years ago


I'd love to go to the shareholders meeting this month to ask that very question, but won't be able to make it.

The craft brewing movement (which started in the 70s from a lot of homebrewers like myself) is a pretty tight group. Even though they compete against each other, they tend to help each other out too--keeping the movement alive is important, there's a lot of fellowship. As an example, during the 2008 hop shortage (where prices skyrocketed 2x-3x), SAM donated hops to fellow brewers to help them out since they had hedged contracts at lower prices.

Having said that, for a craft brewer to acquire another would probably 'look bad' in the community and Jim Koch would probably lean towards another brewery purchase like the Pennsylvania purchase, instead of an outright acquistion. Just my 2 cents, of course.

Did you get to read my snapshot of the craft brewing industry in 2010?

http://www.gurufocus.com/news/126946/have-a-microbrewtailwinds-for-the-craft-brewing-industry

Alex Morris
Alex Morris - 3 years ago
Good insight; yeah, your article when you wrote it, and generally agreed. I'm starting to notice that more craft brands are getting on the shelves in local supermarkets, a nice trend for the industry. It's going to see what BUD and TAP keep doing as they try to mitigate no growth in the (what should be called) bottled water segment of the beer industry. But thats just my opinion, as a happy drinker of Samuel Adams and Left Hand Brewing Company products (to name my two personal favorites).

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